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Will “Groupon Reserve” Save Groupon Inc (GRPN) or Open Doors for Others?

Groupon Inc (NASDAQ:GRPN)Companies are always evolving at different rates. Some companies are in the process of rebuilding their brand, fixing flaws, and tweaking their business. Others are focused on maximizing the returns of their current successes through expansion. Then there are others that are looking for a catalyst to push them over current plateaus and spark future growth. Sometimes, a few of these companies seem to meet at a fork in the road at the same time.

A new Groupon?

Groupon Inc (NASDAQ:GRPN), the daily deals household name that is approaching the two-year anniversary of its IPO this coming November, released “Groupon Reserve” on its website in the first week of July. Touted on the site as featuring “exclusive offers, exceptional experiences, easy reservations, up to 40% off, no-pre-payment, and no vouchers required,” it looks like the next step for the company that has fallen over 66% since its IPO.

At first glance, the change looks like a plus for customers. However, Is it really a plus for Groupon Inc (NASDAQ:GRPN) overall? The company’s stock is up 82% this year , mostly due to a surprising first quarter revenue beat and speculation. Despite being up, quarterly profit margin and net income averages since the IPO has largely been in the red at -3.6% and -$20.6 million, respectively. Although revenue shot up to $2.3 billion last year from just $313 million in 2010, the company is still lost $67 million last year.

One key problem Groupon Inc (NASDAQ:GRPN) may face is possible cannibalization of its core daily deal segment. If customers can use Groupon Reserve, which on paper looks superior in every way to the company’s standard offers, then what is stopping customers from completely ignoring the regular deals? Groupon now has 41 million customers worldwide, and while North American revenues grew 42% last quarter as the international segment fell 18%, there is a small catch – 56% of company revenues still come from overseas. This means that if the trend continues, Groupon Inc (NASDAQ:GRPN) will continue to see operating income decline like it did in the first quarter of 2013 when it went from $39.6 million to $21.2 million.

There is also a possible branding issue with Groupon. Past issues like vouchers not being accepted and the lack of clarity in deals of the past may still haunt customers and prevent them from testing out Groupon Inc (NASDAQ:GRPN) Reserve. Likewise, weak endorsements from the Wall Street consensus still puts the one-year price target under the current share price by over $2.

Expanding tables

Scotland-based Eveve and now Groupon’s Reserve are two of the bigger names trying to jump into the market that OpenTable Inc (NASDAQ:OPEN) currently dominates in the US. Calling itself the world’s leading provider of online restaurant reservations and seating more than 12 million diners per month through online bookings, OpenTable Inc (NASDAQ:OPEN) is now looking to expand on its successful business model internationally.

Unlike Groupon, OpenTable’s business appears more focused on helping restaurants prosper. The company’s propriety reservation software if being used by businesses with much success and this helps keep OpenTable Inc (NASDAQ:OPEN)’s revenues very predictable on a month-to-month basis. Additionally, unlike Groupon Inc (NASDAQ:GRPN), OpenTable’s revenues are mainly  from North America and the company has a very high customer retention rate.

The business model works well financially as the company’s stock is up over 122% since its IPO. Quarterly profit margins have steadily gone up over the past five years, climbing from -1.83% in 2008 to 15.69% in the company’s most recent quarter. It should be no surprise then that Groupon is trying to capitalize on the trend. Another company may see greater opportunity in adding restaurant reservations to its own business, however.

GRPN Total Return Price data by YCharts

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